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U.S. 2-10 Yield Spread to Narrow, RBS Says: Technical Analysis

The extra yield Treasury investors require to own 10-year notes compared with two-year securities may extend its decreases amid turmoil in Europe and slower growth in China, according to Royal Bank of Scotland Group Plc, citing technical analysis.

Slow stochastics, an indicator of momentum, show the difference between two- and 10-year note yields is poised to narrow after the directional indicator breached a level that indicates sentiment is extreme, said John Briggs, an interest- rate strategist in Stamford, Connecticut, at RBS Securities Inc. Investors can take advantage of this trend by selling the two- year note and buying the 10-year security, he said.

“The risk-on rally has run its course,” Briggs said in a phone interview. “The momentum in the market is close to signaling more flattening if the rally continues as there is still a lot of uncertainty in the market related to Europe and domestic growth.” Flattening refers to a smaller difference between yields on securities with different maturities.

The yield spread narrowed for a second day in a row, decreasing 2 basis points to 1.85 percentage points at 1:08 p.m. in New York, the least in a week. A drop below 1.52 percentage points in the spread, according to Briggs, may indicate a further drop to 1.23 percentage points.

Two-year Treasury note yields were little changed at 0.27 percent. The 10-year-note yield fell three basis points to 2.13 percent.

In technical analysis, investors and analysts study charts of trading patterns to forecast changes in a security, commodity, currency or index.

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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